Accounting is concerned in putting into record the numerous activities of the organization (economic entity) that affect its financial position - The domain of Accounting is concerned with the recording of various financial activities of an economic entity. These financial activities may be technically categorized into three (3) classifications.
Classifications of Financial Activities
1. Transactions (or external events) - transfer of resources or obligations to or from other entities over which the economic entity is an active or direct party, e.g. sale or purchase of services or merchandise.
2. Internal events -- financial activities of the economic entity that do not involve other outside entities; e.g.production of goods by a manufacturing concern; provision for bad debts; provision for depreciation, and others.
3. Other events – happenings that affect the financial position of the economic entity but the entity having no director active par ticipation
Examples of these other events are: payment of assessment of real property taxes levied by the government, losses from natural calarni ties, losses from theft, losses in the decline of market values of assets, and others.
By and large, the definition of Accounting by the American In stitute of Certified Public Accountants (AICPA) is the more popular as it is used by many accounting teachers and local accounting literature All the definitions however describe Accounting in a nutshell as: an art and a discipline; a service activity, and a process that includes a series of actions with the end view of furnishing users of information about the organization's financial activities through financial that these users may improve their decision making processes.
A Certified Public Accountant (CPA) is one who is a graduate of a formal college course in Accountancy and has passed a national licensure examination (CPA Board Examinations) lead ing to the practice of the accounting profession. In the Philip pines, the institute for the Filipino CPAs is called the Philippine Institute of Certified Public Accountants (PICPA).
Functions of Accounting
The definition of Accounting by AICPA mentions the four (4) functions of Accounting:
1. recording
2. classifying
3. summarizing
4. interpreting
Recording - the process of putting into writing the financial activities of the enterprise chronologically. The term "chronologically" means that financial activities are recorded in the order of their actual happening. The recording may be done manually in the accounting book called the journal or electroni cally with computers. With the computers, the journal may be substituted by a computer device used to store electronic data, maybe the hard disk or a compact disk. Manually or electroni cally, the recording of transactions and events is technically called "journalizing."
Classifying - the process of grouping into specific classifi cations similar or like transactions; e.g. payments of rent is classi fied under "rent expense", sale of services under "service income,” obligations arising from purchase of merchandise under accounts payable, and others. Classifying of transactions and events is effected manually in another accounting book called the general ledger, or electronically with computers. Manually or electronically, the classifying of financial activities into specific account classifications is technically called "posting"
Summarizing - the process of preparing financial reports (interchangeably used to mean "financial statements") from the re corded and classified transactions and events of the enterprise. As these reports contain financial information about the activities of the enterprise and further that the information is used for decision making by management, financial statements may be prepared periodi cally, i.e. monthly, quarterly, semi-annually, and annually. Parties other than management normally find annual financial reports sufficient for their purposes.
Interpreting -the process that supplies answers to questions about the profitability, stability, solvency, and liquidity of an enterprise.
Profitability is the ability of the enterprise to generate profit from its operations, stability refers to the ability of the enterprise to stay viable, i.e. generate profit for the owners, sustain operations and pay for long term financial obligations. Solvency should mean that the enterprise is capable of paying its short term obligations while liquidity refers to the enterprise having sufficient cash.